Rubio’s “Student Investment Plan”: Market Solution or Bad Bet?

Ross Campbell*

Will Marco Rubio's plan help students?

Will Marco Rubio's plan help students?

On Tuesday, presidential candidate Marco Rubio lambasted American higher education as a “cartel” that blocks low-cost competition and churns out massive debt for new graduates.  This is old news, and perhaps an understatement. It is no secret that the glut of federally guaranteed loans has likely contributed to tuition hikes and administrative bloat at American universities. (See the so-called “Bennett Hypothesis.”) But with college degrees being touted as the new “high school diploma,” or a sine qua non for upward mobility, student are less willing to balk at tuition prices and forego college altogether—after all, why not pass the buck five, ten years down the line?  As it stands, two-thirds of recent graduates hold some level of debt, the average borrower being $26k in the red, with combined loans totaling more than $1.2 trillion. If students default, the U.S. taxpayer is on the hook. As tuition climbs sky-high, and short-sighted students pile on debt with slim job prospects, it is no wonder that politicians are straining to reevaluate our position.  (The Federal Reserve Bank of New York estimates that 11.3% of loan payments are delinquent.)

Among other proposals for reform, Rubio again trotted out his “Student Investment Plan,” which would allow students to partner with certified investors who would front tuition costs in return for a percentage of a student’s earnings for a limited time after graduation. This plan recalls Milton Friedman’s reference to “Human Capital Contracts” in his 1945 book Income from Independent Professional Practice, where he imagined a world in which “[i]ndividuals sold ‘stock’ in themselves . . . [and] investors could ‘diversify’ their holdings and balance capital appreciation against capital losses.” It is also cousin to the “pay-it-forward” legislation recently proposed in Michigan and Oregon, in which the state would initially cover tuition costs, but students would be bound to pay back a percentage of their incomes to finance future generations.

Under Rubio’s proposal, an investor might cover 10k in tuition, and after assessing the risk factors of college major, institution, and GPA—ask for 4% of income per year for 10 years, regardless of whether that amounts to more or less than the original 10k . This proposal echoes President Obama’s “pay as your earn” plan that would allow American to cap loan payments at 10% of their income, with the debt forgiven after twenty years. However, Rubio’s plan has the added benefit of not costing the government an estimated $22 billion in loan forgiveness.

Most strongly in its favor, this proposal appears to shift risk from students onto willing investors, rather than the general public. After all, a student would only be concerned with paying back an agreed-upon percentage, and not enter into a negative feedback loop of trying to keep up with an unmanageable principal. (As a rising 3L, it bears reflection that the typical law student graduates with $122k in student loan debt, while half of lawyers start at a salary of less than $62k a year.)

As for its detractors, some have critiqued Rubio’s plan for creating little actual risk for potential investors (e.g., it would only take about 10 years for an investor to recoup a 10k investment, if a student paid 4% on a 25k salary), and for the fact that investors could refuse to finance certain majors or instead charge exorbitant interest rates. Indeed, some caution, this plan could arguably allow greater debt burdens than high-interest federal loans. Further, some believe that such contracts could deter the meandering path of many students between majors, as such choices could trigger higher interest rates or scrap funding altogether. Finally, it would seem that Rubio fails to address the lack of bargaining power and sophistication of many students who might enter into raw deals. These are valid concerns, yet they appear to miss the point—Student Investment Plans are less panacea, and more just an additional option for students that want to opt out of traditional funding structures. Further, the doctrine of “unconscionability” in contract law would provide students with a defense to patently unfair terms, not to mention the inevitable regulation that would guide this practice.   

For some, a Student Investment Plan may be a good bet. After all, why settle for federal interests rates if you believe you can negotiate something more favorable? Further, a student could have the best of both worlds and use federal loans to finance their “meandering years,” and then bargain with certified investors if they so choose. These funding structures would also offer real-time assessment of college value and the marketability of certain degrees— if colleges are largely modeled on preparing students for future employment, what better gauge than amount of earning potential investors attribute to them? In the end, students should have the option of capitalizing on their potential. (Or, in the rhetoric of others, “sell themselves to investors to pay tuition.) Though Rubio has yet to give more concrete details on his Plan, reasonable alternatives to the current regime should be regarded as a good start.

*Ross Campbell is a Senior Articles Editor for the NYU Journal of Law & Liberty.